Personal injury settlements are generally not taxable in Ohio. However, certain portions of a settlement may be taxable, depending on what the money is meant to compensate you for. Medical bills, lost wages, and non-economic damages resulting from physical injuries are typically not taxable, but other forms of personal injury compensation, such as punitive damages, may be.
Knowing these rules can help you avoid any unforeseen tax implications of a settlement. You can talk to a Cincinnati personal injury lawyer at Postman Law if you have further questions.
How Do Taxes Affect Personal Injury Settlements in Ohio?
Rules for the taxability of personal injury settlements depend on IRS determinations. The IRS does not generally consider personal injury settlements as taxable. However, the IRS distinguishes between compensation for physical injuries and sickness and other types of compensation, such as punitive damages.
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Compensation for Medical Bills Is Generally Not Taxable
Compensation for medical bills and physical injuries in a personal injury settlement is normally not taxable. Because this money is meant to reimburse you for medical bills and expenses, it’s not subject to federal or state income taxes. Your lawyer from Postman Law can seek compensation for the following:
- Emergency room bills
- Surgery and specialized treatment costs
- Rehabilitative therapy costs
- Outpatient follow-up care
- Prescription medications
- Medical devices (e.g., mobility devices, prostheses, etc.)
Medical bills also include the cost of counseling or psychological therapy for mental and emotional issues directly related to your physical injuries, such as PTSD.
There is one important exception to this rule: If you claimed any of these expenses as a deduction on your taxes in previous years, you may have to pay taxes. This is due to the IRS “tax benefit” rule, which exists to prevent individuals from getting a double tax advantage.
Compensation for Lost Income After a Physical Injury Is Generally Not Taxable
If you miss work because of your injuries, you can claim the value of lost work income and other forms of employment compensation. If your lost wages resulted from a physical injury, you generally do not have to pay state and federal taxes on them.
However, if your lost income is related to an emotional or psychological injury, the settlement generally is taxable. Your lawyer from Postman Law can clarify what is or is not taxable in your unique situation.
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Non-Economic Damages Are Generally Not Taxable
The personal injury settlement that our team at Postman Law helps you obtain may also include non-economic damages for subjective and psychological losses. These include things like pain and suffering, emotional distress, mental anguish, and quality-of-life reductions.
Non-economic damages are generally not taxable, provided they are the result of a physical injury or sickness. For example, pain and suffering damages for injuries after a car accident would not be taxable.
However, like lost wages, emotional distress damages that are not connected to a physical injury, such as an employment discrimination lawsuit, may be taxable.
Which Parts of a Personal Injury Settlement Are Taxable in Ohio?
Compensation for medical bills, lost wages, and emotional distress from physical injuries is usually not taxable under current IRS guidelines. However, there are some types of compensation from a personal injury lawsuit that you may need to pay taxes on. Failing to report these on your tax returns could result in a penalty.
Punitive Damages
Punitive damages are sometimes awarded to injury victims to punish the offender for egregious or wanton misconduct. Since these damages are not meant to compensate you for losses, they are taxed as regular income. You must report punitive damages when you file and pay state and federal taxes on them.
Interest on Settlements
Some settlements may also include judgment interest. This interest compensates a plaintiff for the time they spent waiting on a settlement. In Ohio, judgment interest is gauged on an annual basis. If your case drags on for several years, you may receive judgment interest that will be taxable.
Reporting Taxable Income from a Personal Injury Settlement in Ohio
If a portion of your personal injury settlement is taxable, you need proper documentation to avoid any unpleasant tax surprises. A settlement should contain an itemized breakdown of the individual components, such as medical bills, non-economic damages, and lost wages.
Getting an itemized list helps ensure you’re reporting the right amounts on your taxes. You should also consider working with a tax professional who can provide guidance and help you avoid common filing mistakes.
Even if your settlement is fully non-taxable, you should still keep detailed receipts and records of your payments. These can come in handy if the IRS conducts an audit and you need to prove the tax-exempt nature of the money.
Contact an Ohio Personal Injury Lawyer from Postman Law
Do you have more questions on the taxability of personal injury settlements in Ohio? If so, contact our team at Postman Law today online or call us to schedule a free consultation. We have recovered billions of dollars for injured clients and are here to help you next.